The main consequence of qualifying as a real estate operator under §469(c)(7) is that §469(c)(2), defining rental activities as per se passive, does not apply for the taxable year to the rental real estate activities of the taxpayer.
Only individuals are capable of performing "personal services" (as defined in section 1.469-9(b)(4)), and the statute specifically states that the personal services must be performed by the taxpayer. Section 469(c)(7)(D)(i) provides a separate "gross income" test for closely held C corporations to qualify for treatment under section 469(c)(7), but the statute otherwise does not provide any rules for trusts, estates, or personal service corporations.
The substance of §469(c)(7) is best considered in four stages:
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First, who qualifies as a real estate operator under the rule?
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Second, if one so qualifies, how does one group one's interests in rental real estate into activities?
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Third, how does a qualified taxpayer establish material participation in the rental real estate activities that result from one's groupings?
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Fourth, what special interpretive problems relating to limited partners does the provision create?
It is the IRS' position that a trust cannot meet the qualifying tests of 469(c)(7)(B) because those tests are intended to apply only to individuals.
Only individuals are capable of performing "personal services" (as defined in section 1.469-9(b)(4)), and the statute specifically states that the personal services must be performed by the taxpayer. Section 469(c)(7)(D)(i) provides a separate "gross income" test for closely held C corporations to qualify for treatment under section 469(c)(7), but the statute otherwise does not provide any rules for trusts, estates, or personal service corporations.
We believe this position is not only supported by a plain reading of the statute and regulations, but by the legislative history for section 469(c)(7) which explicitly states that this provision is intended to apply to individuals and closely held C corporations.
We believe it is clear that trusts, estates, and personal service corporations do not fall within the definition of "individuals" for this purpose.
We believe it is clear that trusts, estates, and personal service corporations do not fall within the definition of "individuals" for this purpose.
The case currently before the Tax Court on this issue is Frank Aragona Trust, TL-15392-11.
IRS Dissallow Your Passive Activity Loss ?
IRS Dissallow Your Passive Activity Loss ?
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